Monday, April 24, 2006

Here We Go…

Chávez Plans to Take More ControlOf Oil Away From Foreign FirmsBy DAVID LUHNOW and PETER MILLARD--Wall Street Journal

Long time readers should recall numerous pieces regarding Venezuela’s importance to our oil and gasoline supply and the increasingly unstable nature of that country’s leadership—see “What if Hunter S. Thompson Ran a Country?” from February 7th of this year.

In that piece I discussed the President of Venezuela recent call for a million “well-armed” men and women to defend itself from a U.S. invasion. That might have been funny on a TV show, but it is real-life, and in real-life, Venezuela is our third-largest source of oil imports.

Now, according to today’s Wall Street Journal, the Venezuelan President is upping the ante in his obvious attempt to gain complete control over the largest source of oil reserves outside Saudi Arabia:

Venezuelan President Hugo Chávez is planning a new assault on Big Oil, potentially taking a major step toward nationalization of Venezuela's oil industry that could hurt oil-company profits, reduce production and put further pressure on global oil prices.

Forget Iraq: things could get very interesting, very quickly, right in our own back yard.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

11 comments:

I was mulling this over recently: Does Venezuela have an oblgation to turn their oil reserves over to "big oil"? I confess to not being well read on the subject of Venezuela or Hugo Chavez, but I understand that nationalizing the country's oil supply was a campaign promise.

After Iraq, I don't think someone like Chavez is being a kook for anticipating military action for not playing ball with the oil companies.

If I am not mistaken, the oil minister from Venezuela was the driving force behind the creation of OPEC in the early 1970s or late 60s, so I would guess the Venezuelans feel least obligated to hand over their oil reserves.

Isn't a campaign promise in a dictatorship some sort of oxymoron?

Chavez is a kook, but he's no petropolitical babe in the woods. Watch President Bush suddenly become very concerned about the disturbing loss of democratic dynamism in Venezuela...

Chavez seems to be following in the steps of the Iranian President. Every time they threaten to destabilize the supply, the price per barrel goes up. I gotta believe that means more money in their collective pockets.

"Does Venezuela have an oblgation to turn their oil reserves over to "big oil"?"

Yes. They have legally contracted with most of the big oil cos to different extents to have them invest and set up the operations and eventually harvest the oil from Venezuela's oil fields. What Chavez has done is say "Remember when we lured you to spend $13bn to build these projects by giving you a 50% tax rate and a 1% royalty rate for our particularily difficult to harvest oil deposits (which we Venezuela would not have been able to harvest ourselves)? Well we have decided to make up our own rules, retroactively, as to what we will charge you, and we will also make it clear that we will also seize, without any compensation, your operations like we just did to Total. Thanks."

The reason it's a problem is that these companies wouldn't have invested a cent into VZ if not for the economic terms they had been given. Now Chavez is seeking to appropriate something Venezuela already gave away. It endangers global oil stability, but it endangers VZ the most, as who will want to invest in a country where anything you do that is productive has a chance of being taken away or just taxed to the brim? No one.

Johnny Debacle: Thanks for explaining that to Effern. Well-summarized. What Effern calls "big oil" (doesn't that phrase just reek of an anti-corporate, anti-capitalist mindset) are in fact just companies that make business decisions. The decisision to invest billions in Venezuela was predicated upon being able to recoup that investment, plus an investment profit/return, over a period of time.

When one party to a contract (Chavez) unilaterally and arbitrarily decides after the fact to alter the terms of the contract - to his sole benefit - it is unfair, and ultimately unsettling to future business decisisons. If any 4th rate tinhorn dictator can simply lure in corporate investors and then grab the assets after the money has been spent, what does that do to the flow of investment dollars into regions that desperately need it, or into areas development (energy, etc.) that could benefit the global economy?

When one party to a contract (Chavez) unilaterally and arbitrarily decides after the fact to alter the terms of the contract - to his sole benefit - it is unfair, and ultimately unsettling to future business decisisons. If any 4th rate tinhorn dictator can simply lure in corporate investors and then grab the assets after the money has been spent, what does that do to the flow of investment dollars into regions that desperately need it, or into areas development (energy, etc.) that could benefit the global economy?

And it can't happen here? What you are describing is the monetary and fiscal policy of the United States in the late 60s and 1970s. We inflated away the value of the dollars and assets we traded with our oil partners and hence they whacked us. Debasing the currency through the printing press quite economically similar to welching on an inforce contract.

Dale,Funny how you bring up the 70's. That's around the time investors lost some interest in US paper assets. Then you saw dramatic rises in more tangible assets (i.e. gold, real estate, etc.). Will history repeat or has it already begun?

I am surprised no one on the board has mentioned Nigeria as another potential "issue" for the global supply of oil. If I'm not mistaken, Nigeria back in 1999 completed a new constitution and formed a civilian government. Like VZ, Nigeria is also oil-rich and politically poor when it comes to implementing democratic reforms.

What is to prevent another military dictator from overtaking the Obasanjo administration and undo the reforms that have been put into place with help from the IMF for privatizing its oil industries (I am not making that up - just look at the CIA fact book on Nigeria for further information)?

Just wondering, and I could be wrong.

P.S. - I agree wholeheartedly with JD's comment that property rights and a country's prosperity go hand in hand.